The NAM/IndustryWeek Manufacturing Index -- 3rd Quarter 2007
Confidence among large
manufacturers in the third quarter of 2007 registered the biggest drop in four
years. Sales and investment expectations slowed as well. Meanwhile, the
business outlook for small manufacturers edged down only modestly in the third
quarter after a slight upturn in the second quarter.
By David Huether, Chief Economist, National Association of Manufacturers
63% of large and 76% of small manufacturing companies who responded to a survey conducted by the National Association of Manufacturers (NAM) had a positive business outlook for their firm in the third quarter of 2007. For small respondents, the drop in confidence in the third quarter was the fourth decline in the past six quarters. The level of optimism stands at its lowest point in four years. While this level of confidence is lower than during the 2004-2006 time period, it remains higher than the 2001-2003 period, when manufacturing went through a deep recession followed by a period of weak growth.
Large manufacturers' business outlook tumbled 17% in the third quarter. This marks the largest quarterly drop in three and a half years. And while the current level of optimism remains well above the 2001 average of just 48%, the third quarter decline signals slower growth going forward.
248 NAM member companies responded to the survey. Large (those employing over 1,000 workers) and small companies recorded their business outlook as well as their 12-month expectation on sales, prices, capital investment, inventories, employment and wages.
The confidence level of manufacturers has gone through 3 periods since the survey began in late 1997. In the tail end of the 1990s expansion, the percentage of survey respondents with a positive outlook averaged around 80%. Then, during the 2001-2003 period (the recession and slow initial recovery) confidence fell significantly. It was not until the 2004-2006 period of time, when the manufacturing recovery picked up significant momentum, that confidence levels increased.
Since the first quarter of 2006, the business outlook for both large and small manufacturers has been on a downward path. This has coincided with slowdowns in both manufacturing production and GDP growth, due in large part to the housing downturn and its effects on other sectors of the economy such as consumer spending. The third quarter downturn in manufacturers' business outlook signals that a period of sluggish growth will likely continue into 2008.
Business Outlook
(Percentage of firms With a positive business outlook)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
2007 (qtr 2) |
2007 (qtr 3) |
| Large |
78% |
66% |
88% |
78% |
80% |
63% |
| Small |
81% |
64% |
85% |
77% |
79% |
76% |
Sales Expectations. Looking ahead 12-months, both large and small manufacturers expect their sales to continue to increase, but at slower rates than earlier in the expansion. Small firms expect their sales to increase by 3.1%. This is slower than the expectations during the first half of the year and, in fact, the slowest expectation of future sales growth since the second quarter of 2003, when small respondents expected their sales to increase by 2.6% over the coming 12 months.
Large firms expect their sales to increase by a more-moderate 2.8% over the next 12 months. This is a slowdown from the first half, when large companies expected sales to grow by more than 4% over the coming year. The prospect of 2.8% growth over the coming year is the slowest expectation of the current expansion. The last time sales expectations were lower was in the fourth quarter of 2001, when large manufactures expected sales in rise by 1.8% over the coming year.
Sales Outlook
(12-Month Percent Change Expectation)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
2007 (qtr 2) |
2007 (qtr 3) |
| Large |
4.8 |
2.7 |
4.9 |
4.0 |
4.5 |
2.8 |
| Small |
4.0 |
2.4 |
4.6 |
4.3 |
3.9 |
3.1 |
Pricing Expectations. Both large and small manufacturers expect their pricing power to remain stable over the coming 12 months. Large firms expect their prices to rise by 1.5%, which is similar to pricing expectations during the first half of the year as well as during the2004-2006 period. Small firms expect the prices of their products will increase by a slightly-more robust 1.8% over the coming year. Again, this is similar to pricing expectations over the past few years.
Continued pricing power is likely a consequence of increasing demand as well as the value of the dollar. Since the dollar peaked in February 2002, it has fallen in value by 22%. As the dollar has retreated, import prices have become inflationary, and there is less downward pressure on prices than there was 1998-2002 period when the dollar was on the rise.
Price Outlook
(12-Month Percent Change Expectation)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
2007 (qtr 2) |
2007 (qtr 3) |
| Large |
0.5 |
0.3 |
1.7 |
1.1 |
2.0 |
1.5 |
| Small |
1.1 |
0.7 |
2.1 |
1.6 |
1.9 |
1.8 |
Investment Expectations. Looking ahead 12-months, large manufacturers expect their capital expenditures to rise by just 0.3%, while small companies expect their investment spending to grow by a stronger 1.6%. For both large and small firms, this is a significant slowdown. For large firms, the 0.3% rise in capital investment spending over the next year is the slowest of the expansion. For small firms, the 1.6% expectation is the slowest in four years.
These trends are consistent with a slowdown in overall business investment spending that has taken place over the past year. The third quarter survey suggests that investment spending by manufacturers will continue to growth over the next year, but at a slower pace than during the past few years.
Investment Outlook
(12-Month Percent Change Expectation)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
2007 (qtr 2) |
2007 (qtr 3) |
| Large |
1.5 |
0.9 |
3.1 |
2.3 |
2.3 |
0.3 |
| Small |
2.4 |
0.8 |
2.5 |
2.3 |
2.2 |
1.6 |
Inventory Expecations. Both large and small survey respondents expect to reduce inventory levels over the next 12 months. Large firms expect to reduce inventories by 1.9% over the next 12 months while small companies expect to reduce inventories spending by a more moderate 0.6% over the coming year. Both large and small companies expect to reduce inventory investment at a greater rate than in the year.
While this is could be correctly interpreted as an expectation of slower growth going forward, another force likely driving inventory investment down is the fact that nationwide, the inventory-to-sales ratio for overall manufacturing reached a four-year high in March 2007. Therefore, an effort to bring inventory levels back down is likely a driving force behind the third quarter results.
Inventory Outlook
(12-Month Percent Change Expectation)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
2007 (qtr 2) |
2007 (qtr 3) |
| Large |
-1.5 |
-1.8 |
-1.0 |
-1.3 |
-1.7 |
-1.9 |
| Small |
0.2 |
-0.8 |
0.1 |
-0.5 |
-0.6 |
-0.6 |
Employment Expectations. Both large and small respondents to the third quarter survey expect to increase employment over the next 12 months. Large firms expect employment to increase by a modest 0.4%, while smaller firms expect their employment levels to increase by a stronger 1.6%.
For both large and small respondents, the third quarter responses were similar to expectations expressed in the in the first half of the year. Overall, employment expectations, while positive, are not as robust as during the 2004-2006 period. This parallels Labor Department data on manufacturing employment, which rose slightly during the 2004-2006 period and has softened more recently mainly due to spillover effects into manufacturing from the downturn in housing.
The third quarter results are consistent with relatively small positive growth in manufacturing employment in most sectors, though the on-going downturn in housing could pull down overall manufacturing employment over the course of the next year.
Employment Outlook
(12-Month Percent Change Expectation)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
2007 (qtr 2) |
2007 (qtr 3) |
| Large |
0.8 |
-0.5 |
0.7 |
0.5 |
0.3 |
0.4 |
| Small |
2.1 |
0.8 |
1.8 |
1.3 |
1.7 |
1.6 |
Wage Expectations. Large survey respondents expect wages to increase by 1.9% over the coming 12 months, this is the same expectation as in the second quarter and slightly lightly slower than the 2.5 pace expected in the 2004-2006 period. Small companies anticipate wages to increase by a stronger 2.2% over the coming year. This is roughly same as the 2.3% response in the second quarter and identical to the 2.2% increase expected during the 2004-2006 period.
This signals that wage growth, while positive, remains contained and continues to indicate that there should not be significant inflationary pressure on the wage front from the manufacturing sector in going forward.
Wage Outlook
(12-Month Percent Change Expectation)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
2007 (qtr 2) |
2007 (qtr 3) |
| Large |
3.1 |
2.2 |
2.5 |
2.0 |
1.9 |
1.9 |
| Small |
2.9 |
2.0 |
2.2 |
2.0 |
2.3 |
2.2 |
All charts developed by the National Association of Manufacturers (NAM).
See Also:
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